Reserve Bank of India (All India Financial Institutions – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025: Key Features and Implications for India’s Credit Framework

Introduction

The Reserve Bank of India (“RBI”) has recently introduced the Reserve Bank of India (All India Financial Institutions- Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025, which sets up a transparent, uniform and fair process in order to prevent the misuse of public money and strengthen India’s financial stability by systematic transmission of information. The directions are issued amidst rising public anger over “rich defaulters” creating an unfavourable impact on credit and taxpayers.

Background: Wilful Defaulters and Large Defaulters

RBI earlier used annually updated Master Circulars on Wilful Defaulters. After a comprehensive review for 2023–24, it issued consolidated Master Directions covering banks, Non-Banking Financial Companies (“NBFCs”), and All India Financial Institutions (“AIFIs”). The 2025 AIFI-specific Directions now adopt a unified framework for development institutions, such as National Bank for Agriculture and Rural Development (“NABARD”), Small Industries Development Bank of India (“SIDBI”), Export-Import Bank of India (“EXIM Bank”), National Housing Bank (“NHB”), and National Bank for Financing Infrastructure and Development (“NaBFID”).

A “wilful defaulter” is defined as when funds are diverted to purposes other than those for which the loan was sanctioned, siphoned off so that they are no longer available in the business, or when assets given as security are sold or disposed of without the lender’s consent, or when promised equity is not infused despite the ability to do so.

A person is generally brought into the wilful defaulter framework once the outstanding amount exceeds ₹25 lakh. In the case of companies, this can extend to promoters and key managerial persons, where their role or knowledge in the default is established.​​

A “large defaulter” is a borrower whose default is significant in size rather than in intent. This captures borrowers with outstanding dues exceeding ₹1 crore. The objective is to ensure that the financial system pays special attention to sizable problem accounts, even if they have not yet been classified as wilful, so that lenders are alerted and can act in a coordinated manner.​​

Scope and Applicability

The 2025 directions apply primarily to the five AIFIs: EXIM Bank, NABARD, NHB, SIDBI, and NaBFID, deriving authority from Section 45-L of the RBI Act, 1934 and Section 11 of the Credit Information Companies (Regulation) Act, 2005. They govern how these institutions identify and act against wilful defaulters and large defaulters. However, certain provisions, particularly the restrictions on granting further credit to such defaulters, are binding on all entities regulated by the RBI, not only AIFIs, thereby promoting uniform credit discipline across the financial system.

Key terms shape the framework. A borrower includes anyone availing a fund-based or non-fund-based credit facility, while a guarantor becomes liable if they fail to honour guarantees despite having sufficient means. Associated entities include subsidiaries, joint ventures, associate companies, or entities where a wilful defaulter is a promoter, director, or person in charge. A suit-filed account refers to cases where recovery proceedings or insolvency actions are pending. Diversion and siphoning of funds relate to the misuse of sanctioned credit for unauthorised purposes. Promoters and directors may also be classified as wilful defaulters when default occurs with their knowledge, consent, or failure to object.

Procedure and Penalties

The directions embed a natural-justice-based mechanism within every AIFI. Each institution must adopt a Board-approved policy explaining how wilful default cases will be identified and processed. Non-performing accounts (“NPAs”) exceeding ₹25 lakh are initially screened by an Identification committee. Where wilful default is suspected, a detailed show-cause notice is issued. If the explanation is unsatisfactory, the matter is referred to a separate Review Committee, which considers material on record, written submissions and personal hearing before passing a reasoned order.

Directions entail strong deterrents. AIFIs are barred from granting any additional credit to wilful defaulters or their associated entities, including a one-year prohibition even after removal from the defaulter’s list, and a five-year bar on financing new ventures promoted by such persons. Criminal proceedings are permitted in appropriate cases. The Directions also tighten accountability by extending potential classification as a wilful defaulter to guarantors who fail to honour guarantees despite having the capacity to do so. Beyond post-default classification, the Directions emphasise preventive measures such as stricter credit appraisal and verification against defaulter lists.

Implications for India’s Credit Framework

As of March 31, 2025, 1,629 corporate borrowers owed approximately ₹1.62 trillion and were listed as wilful defaulters by public-sector banks. This highlights a financial landscape that has long struggled with wilful defaults and “evergreening” of bad loans and public concern over preferential treatment of influential borrowers. In this backdrop, a clear, uniform and transparent framework for identifying such defaulters is essential not only to avoid arbitrary stigma but also to ensure genuine deterrence across all financial institutions.

The 2025 directions strengthen the framework in several ways. By recognising the role of guarantors, auditors and other third parties, the directions aim to combine credible restructuring options with personal responsibility for past misconduct. At the same time, the framework is not without concerns. There is a real risk of misuse and “over-classification” where genuine business failure is mislabelled as wilful default.

If implemented with caution, these Directions are likely to raise the reputational and economic cost of misconduct for borrowers and avoid siphoning of funds. For AIFIs, they can contribute to a more disciplined credit culture, provided the scrutiny does not compromise the developmental mandate.

Conclusion

Overall, the 2025 Directions mark a significant step in hardening the regulatory response to wilful and large defaults while embedding clearer procedural safeguards. If consistently implemented, they can improve credit discipline and transparency across the system, even as regulators and lenders remain alert to the risks of overreach in their application.